A limited partnership (LP) in real estate is a legal investment vehicle with two primary classes of partners: one or more general partners (GPs) who run the deal and assume managerial responsibility, and limited partners (LPs) who contribute capital but do not participate in day‑to‑day management. LPs generally have limited liability — their losses are capped at the amount they invested — while GPs have management control and broader liability. Real estate LPs are commonly used to pool capital for acquisitions, developments and syndications so passive investors can access larger, institutional‑grade assets.
Sponsors and operating teams form LPs to raise equity from passive investors (individuals, family offices, or institutions). Typical use cases include multifamily ground‑up developments, commercial acquisitions and value‑add repositionings. In a syndication, the sponsor is usually the GP and outside capital comes from LPs, who receive income and capital appreciation while the sponsor manages operations and exit strategy.
The GP runs the investment: sourcing the asset, negotiating purchase terms, securing debt, hiring property managers, approving budgets, and ultimately choosing when to refinance or sell. The GP owes fiduciary duties (varying by jurisdiction and contract) to act in the partnership’s best interest and must follow the governance rules set out in the limited partnership agreement.
Limited partners provide capital and typically have no authority to manage operations. Their rights are contractual: common protections include information and inspection rights, specified voting rights for major decisions (e.g., sale, capital call increases, GP removal), and priority in certain distributions. LPs must avoid taking actions that would be construed as “control” to preserve limited liability.
Sponsors often create a separate entity (an LLC or corporation) to act as the GP to insulate individual principals from direct liability and to centralize management. The GP entity receives sponsor economics (management fees and carried interest or “promote”) while limiting personal risk. This wrapper also simplifies ownership transfer among sponsor principals and helps with indemnification and insurance arrangements.
LPs enjoy limited liability when they remain passive and comply with the partnership agreement and state filing requirements. Protection can be lost if an LP participates in control or management (signing contracts, directing property operations), personally guarantees loans, or co‑signs leases — any activity that courts view as acting like a GP.
GPs face broader exposure: partnership debts, litigation, and contractual obligations. Sponsors mitigate this by using corporate wrappers (an LLC or corporation as GP), purchasing robust liability insurance (D&O, E&O, property and casualty), and negotiating indemnities in the LP agreement. Nevertheless, personal guarantees (often required by lenders) can reintroduce personal risk for sponsor principals.
LPs are typically taxed as pass‑through entities: income, losses, deductions and credits flow through to partners and are reported on Schedule K‑1. Investors pay tax at their individual or entity rates. K‑1s show each partner’s share of taxable items and must be used to prepare personal tax returns.
Real estate depreciation can create taxable loss allocations (paper losses) that shelter other passive income subject to passive activity loss rules. Passive loss limitations, at‑risk rules, and depreciation recapture on sale can affect tax timing and cash vs. taxable income—consult a CPA for planning around basis, bonus depreciation and 1031 exchange options.
State income/franchise taxes, withholding rules for nonresident partners, and state partnership filing requirements vary. An LP may need to file returns or pay taxes in states where the property is located. State rules can materially affect after‑tax returns, so local tax advice is essential.
Many LPs offer a preferred return (e.g., 6%–9% annual) paid to LPs before the sponsor receives profit splits. After returns and the return of capital, a catch‑up provision may redirect a higher share of profits to the sponsor until a target split is reached. The exact sequence dictates who gets paid and when.
The promote (carried interest) is the sponsor’s share of profits above a hurdle. Common structures: LPs receive preferred returns; once hurdles are met, profits split (e.g., 70/30 LP/G P) with the sponsor’s promote increasing as IRR tiers rise. This aligns incentives but can also incentivize riskier behavior if not well‑structured.
Example waterfall: 1) Return capital contributions; 2) Pay 8% pref to LPs; 3) Catch‑up to sponsor until splits reach 80/20; 4) Residual split 70/30. If a $1,000,000 profit is realized and capital is returned, the pref and hurdle determine how much goes to LPs vs. sponsor according to the contract.
An LP is formed by filing a certificate of limited partnership with the chosen state (often the property state or a business‑friendly state). The filing names the GP, limited partners and registered agent. Formation follows state statutes and usually requires a filing fee.
Key documents include: the Limited Partnership Agreement (LPA) which governs rights/obligations; the Subscription Agreement (investor commitment, suitability representations); and the Private Placement Memorandum (PPM) — the offering disclosure describing risks, fees, and deal terms. Together these form the legal backbone of the investment.
Formation can take days to a few weeks. Filing fees range by state ($50–$500+), plus legal and accounting costs for documentation ($5,000–$50,000 depending on complexity). Sponsors budget these costs into acquisition budgets or offering expenses.
| Feature | LP | LLC | General Partnership |
|---|---|---|---|
| Liability | LPs limited; GP unlimited | Members limited (high protection) | Partners unlimited |
| Management | GP controls; LPs passive | Flexible (member/manager managed) | All partners manage |
| Tax | Pass‑through; K‑1 | Pass‑through (or corp elect) | Pass‑through |
| Transferability | Often restricted by LPA | Typically easier to transfer with agreement | Often difficult without consent |
LPs fit deals with many passive investors where a clear separation of management and capital is needed, such as large syndications and funds. The structure clarifies sponsor control while preserving investor limited liability.
An LLC often suits small groups, joint ventures with active co‑owners, or when more operational flexibility and stronger liability protection for all owners is desired. LLCs also make it easier to grant voting vs. economic classes.
Look for explicit voting thresholds for major decisions, regular financial reporting cadence (monthly/quarterly), annual budgets, and audit or inspection rights. Clear timelines for distributions, reporting formats, and transparency metrics matter for monitoring performance.
Important clauses include distribution priority, how capital calls work and penalties for default, dilution mechanics for additional raises, GP removal procedures (and required votes), and clawback provisions ensuring sponsor over‑distributions are returned if final accounting requires it.
Most LP agreements restrict transfers to maintain control and tax/ERISA compliance. Expect ROFRs, consent requirements, valuation approaches for buyouts, and lock‑up periods. Understand how transfers affect voting rights and future distributions.
Real estate LPs commonly have holding periods of 3–10 years depending on strategy. Dissolution triggers include sale of the asset, bankruptcy, unanimous consent, or other termination events defined in the LPA.
Selling an LP interest often requires sponsor consent, compliance with securities rules, and may face valuation discounts due to illiquidity. Some deals permit assignments subject to substitution of LP and approval; others impose long lockups.
At sale or refinance, proceeds are distributed per the waterfall: return of capital, payment of preferred returns, catch‑up, then promote splits. Refinances that return capital may trigger similar waterfall mechanics depending on the agreement.
Annual asset management fees often range from 0.5% to 2% of invested equity or asset value. Fees may decrease over time or be offset by other sponsor compensation. Fee structures should be clearly disclosed in the PPM and LPA.
Sponsors commonly charge acquisition fees (1%–2% of purchase price), asset management fees (annual), and disposition or disposition‑related fees. Some sponsors credit acquisition fees back at sale or reduce them against future fees; read the LPA to see net fee exposure.
Promote structures (e.g., 20% of profits after an 8% return) reward sponsor performance but can create misalignment if base fees are high or if promote triggers are too low. Look for hurdle tiers tied to IRR or equity multiple to ensure alignment.
Most LP interests in offerings are securities under federal law and must be offered under an exemption (Reg D, Reg S, etc.). The PPM discloses the offering, risk factors and reliance on exemptions to avoid public registration.
Many private LP offerings rely on accredited investor exemptions (e.g., Reg D Rule 506(b)/(c)), limiting participation to those meeting income/net worth thresholds or to a specified number of non‑accredited investors. Verify your status and the offering’s exemption.
Read the PPM for risk factors, fee schedules, conflicts of interest, track record, use of proceeds, projected returns, and legal/financial statements. The subscription agreement will require representations about investor suitability and may include transfer and legend requirements.
State law determines formation details, fiduciary duties, and notice/filing rules. International investments introduce cross‑border tax, withholding and regulatory complexities. The choice of formation state (e.g., Delaware vs. property state) can affect investor protections and governance nuances.
Consult local counsel for formation and agreement interpretation and a CPA for tax planning (K‑1 impacts, state filings, depreciation strategies). Their review can uncover material tax or liability issues not apparent in the PPM.
Sarah, an accredited investor, is approached by a sponsor offering a 50‑unit value‑add apartment syndication formed as an LP. Minimum investment: $75,000. Steps she follows: 1) Requests the PPM, LPA and recent sponsor track record; 2) Has her attorney review the LPA for waterfall, capital call terms and transfer restrictions; 3) Reviews projected returns and sensitivity analyses with her CPA to understand K‑1 impacts and cash vs. taxable income; 4) Signs the subscription agreement, wires funds to the escrow account, and receives confirmation of LP ownership; 5) Receives quarterly reports and annual K‑1s, and monitors asset performance until a refinance returns some capital, then eventual sale after 6 years.
Sarah finds several red flags: the sponsor charges large uncapped acquisition and asset management fees, the LPA allows capital calls with limited LP remedies, and the reporting cadence is vague. She negotiates clearer reporting terms and a cap on certain fees before committing funds.
The property stabilizes; Sarah receives quarterly cash distributions and K‑1s showing depreciation losses that offset other passive income. On sale, the waterfall returns her capital, pays the preferred return, and the sponsor earns a promote. After taxes and fees, Sarah’s net IRR meets her target. Lessons: vet fees early, confirm reporting and align investment size with your liquidity needs and tax situation.
LPs provide limited liability for passive partners, but safety depends on remaining passive, not guaranteeing loans, and proper formation and insurance. GPs and personal guarantors remain exposed.
Only if the LPA includes capital call provisions permitting additional contributions. Absent such provisions, LPs typically cannot be forced to contribute beyond their committed amount, though penalties for default can apply.
LP interests are generally illiquid. Transfers usually require sponsor consent and may face lockups, ROFRs, valuation hurdles and legend restrictions—expect sales to take weeks to months or be effectively unavailable until exit.
Yes, if the LP remains active, partners typically receive an annual Schedule K‑1 reporting their share of income, losses and deductions for tax filing.
If you’re considering an LP investment: request the PPM, LPA and cap table; have an attorney and CPA review the documents; confirm your accreditation status and evaluate fee/alignment risks. For targeted vocabulary, see glossary entries such as K-1, syndication and REIT.
